Housing Bill Cuts Reverse-Mortgage Fees

“Some people will say reverse mortgages are absolutely too expensive, while others will tell you they are the greatest deal on earth. What all the years of talking to seniors about reverse mortgages has taught me is that you can show somebody what something costs, but you cannot tell them what it’s worth to them,” said Ken Scholen, founder of the nonprofit National Center for Home Equity Conversion.

Seniors scrutinize costs. They preciously guard their pennies, even when they have quite a few to spend. According to a 2007 AARP survey, cost is the reason 63 percent of reverse-mortgage shoppers ultimately decided against applying for the loan. In fact, 69 percent of actual borrowers believed that reverse-mortgage costs were high, the survey revealed.

Some help is right around the corner. The Housing and Economic Recovery Act of 2008 is several hundred pages long and includes many different items that will have to be implemented during the weeks ahead. One critical item is the amount of origination fees lenders can charge on the country’s most popular reverse-mortgage program.

A reverse mortgage is a loan against a home that is not payable until the homeowner dies, sells the home, or permanently moves out of the home. Reverse mortgages allow homeowners age 62 and older to turn the equity in their home into cash without having to move, give up title or make a monthly mortgage payment. There is no minimum credit or income requirement to qualify for a reverse mortgage.

The Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development, insured 107,367 Home Equity Conversion Mortgages (HECMs) in 2007 compared with 43,131 for 2005. The HECM is the most popular reverse-mortgage program and accounts for nearly 85 percent of the reverse market.

The housing bill recently reduced the maximum fee to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of your home’s value or the county lending limit, whichever is lower.

The new formula for maximum origination fees will become effective concurrently with the implementation of the new HECM loan limits. The loan limits still need to be clarified. Peter Bell, president of the National Reverse Mortgage Lenders Association, said the group still does not have a definitive answer as to whether the bill establishes a single national loan limit at $417,000, or $625,500, or a sliding scale somewhere in between.

“Because one section of the bill points to another, and then the other section references prior legislation, etc., there is some confusion and variation of opinion on exactly what the language in the bill means,” Bell said. “We have had great legal minds interpreting it on our behalf and have been in constant discussion with Hill staffers and FHA. In the end, the conclusion drawn by HUD’s counsel, in consultation with congressional staff, will determine where we have come out.”

HUD expressed serious concern about companies that market reverse-mortgage products with new loan limits before HUD actually figures out what those limits might be. Companies that do so might find themselves subject to disciplinary action for false or misleading advertising, and were advised to wait until the issue is resolved before sending out any marketing information based on new loan limits.

“More seniors are recognizing that traditional retirement tools, such as IRAs, pensions and 401(k)s are not providing sufficient income to help fund everyday living expenses and healthcare,” Bell said. “Through proper education, more retirees are recognizing that the home they have lived in for so many years can now take care of them by using a reverse mortgage to access the equity accumulated over 20, 30, 40 years to help them living more comfortably.”

Reverse-mortgage proceeds can be used for any purpose, and can be taken out as a lump sum, fixed monthly payments, line of credit, or a combination. The loan amount depends on the borrower’s age, current interest rates, and the value and location of the home. A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower’s estate. A senior’s home does not have to be owned free and clear to qualify for a reverse mortgage. Reverse mortgages are often used to retire existing debt on a home.

The early reverse-mortgage programs got a poor reputation because some were flawed and contained huge appreciation shares for the lender coupled with big-time upfront fees. Now, with the federal government insuring a majority of the reverse mortgages with no lender equity shares, the concept has become more acceptable and recognized by consumers.

Thanks to the new housing bill, reverse mortgages will be less expensive to get.

Tom: The origination fee reduction is good for consumers, tho I believe that the minimum fee for the lowest value homes means that those owners pay a much greater percentage of their possible proceeds. There also had been some discussion of reducing the FHA insurance, but that’s certainly not do-able now.

I think, tho, that much of the pressure to forcast proceeds at the new limits is driven by the foreclosure problems in the forward market. Younger seniors, early retirees or those whose have been “outplaced” in middle America, who have lived for years in $300,000 homes with $200,000 mortgages can do little if they are strapped but hope to hang on and wait until new higher limits are formalized.

I would certainly echo your basic premise, tho, which seems to be that for those who want or need reverse mortgages, they are invaluable.

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